Coming Cola War Could Boost Coca-Cola Enterprises

A battle for top vanilla cola could lift the stock, one analyst says.

The second half of Coca-Cola Enterprises' ( CCE) fiscal year may not be as challenging as a Citigroup Smith Barney analyst had initially thought, thanks in part to rival Pepsi ( PBG).

"The introduction of Pepsi Vanilla may actually boost sales of Vanilla Coke as a result of increased marketing spending and promotional support being focused on the 'new' vanilla cola strategy," said analyst Bonnie Herzog. As a result, Herzog upgraded the company to in-line from underperform on Wednesday, based also on the stock's valuation.

Herzog said her research has found that when a competitor introduces a product into an existing category, sales can be boosted for the entire category, in this case, the vanilla cola group. For example, in 1994, Pepsi's introduction of Wild Cherry Pepsi appeared to boost volume of Cherry Coke, said Herzog.

Pepsi Vanilla will be introduced in August. Vanilla Coke hit store shelves in May 2002.

Additionally, the upgrade is based on Coke Enterprises' recent price weakness, at $18.88. "Since February 2003, CCE's stock has dropped 10%, while the S&P 500 has gained 19%." Herzog maintained her $24 price target and sees a 27% upside to the shares.

Shares of Coke Enterprises were recently up 4.7% at $19.76. Pepsi was ticking higher to $20.21.